President Trump has yet to name his pick to replace Jerome H. Powell as chair of the Federal Reserve. But whomever he chooses for one of Washington’s most powerful posts will have to overcome doubts that they are setting interest rates free of influence from the White House or risk eroding the institution’s credibility and causing financial panic.
Investors, economists and former U.S. policymakers warn that Mr. Trump has already undermined the next Fed chair by incessantly attacking the central bank and its current leadership and explicitly acknowledging that he will select only someone who supports lowering borrowing costs.
That criteria has raised concerns that Mr. Powell’s replacement will have made implicit promises to get the job, something that could ultimately constrain the Fed’s ability to implement the right policy settings for the economy if it is at odds with the president’s wishes.
An overtly politicized Fed would buck decades of tradition forged after painful lessons that showed the downsides of the White House meddling in monetary policy decisions. The outcome this time around could be economically calamitous, leading to resurgent inflation and stagnating growth.
“I already don’t trust the next Fed chair, and I don’t even know who it is,” said Dario Perkins, an economist at TS Lombard, a research firm. “There is this perception that Trump has just put in people to be ‘yes-men’ in all different parts of government, so why should the Fed be any different?
Trump’s Demands
Mr. Trump’s demands on the Fed have intensified in his second term as president. Like he did during his first stint in the White House, Mr. Trump has sought to disparage Mr. Powell on a personal level for failing to heed his call to cut interest rates. In recent months, he has branded the chair a “major loser,” a “stubborn mule” and a “numbskull.”
Part of Mr. Trump’s rationale for reduced interest rates is that there is “no inflation.” It’s a point that economists and policymakers broadly refute both in terms of the current data but also in light of widely held forecasts that the president’s tariffs will lift consumer prices at least temporarily this year.
But the more frequent justification Mr. Trump now cites ties a reprieve from the Fed to the costs borne by the government to pay back its debts, a slippery slope toward what is commonly referred to as “fiscal dominance.” That involves the central bank keeping interest rates artificially low so that the government can achieve its fiscal goals, rather than setting policy as Congress intended — to achieve low, stable inflation and a healthy labor market.
Mr. Trump’s timing is significant. Republicans have just passed a huge package of tax and spending cuts that is poised to balloon the deficit. Already, the country earmarks around $1 trillion a year to pay for its obligations, an expense that is poised to rise sharply in the coming years based on the amount of debt the Treasury Department will have to issue to cover what the government spends.
Underscoring his urgency, Mr. Trump on Wednesday again took to social media to call out the Fed, saying that interest rates at the current 4.25 percent to 4.5 percent level are 3 percentage points too high.
Reviving one of his favorite insults of Mr. Powell, the president wrote, “‘Too Late”’ is costing the U.S. 360 Billion Dollars a Point, PER YEAR, in refinancing costs. No Inflation, COMPANIES POURING INTO AMERICA. “The hottest Country in the World!” LOWER THE RATE!!!” Mr. Trump aired his grievances about Mr. Powell again on Thursday.
Linking rate cuts to this reason makes a reduction even less compelling than would otherwise be the case, said Donald Kohn, a former vice-chair at the Fed. And if the central bank were perceived to be acquiescing, that would put it on “dangerous ground,” he said.
“If the Fed were to keep the interest rate low for the purpose of more easily financing the government debt, that would create a chronically inflationary environment,” added Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics who was formerly the chief economist at the International Monetary Fund.
Perils of a Politicized Fed
Arthur Burns, who led the central bank from 1970 to 1978, serves as a cautionary tale for the perils of a politicized Fed.
Mr. Burns is remembered as an ineffective chair, having bowed to political pressure by President Richard M. Nixon and unleashing one of the worst bouts of inflation in the country’s history.
Mr. Nixon, who had previously appointed Mr. Burns as an adviser, sought easier monetary policy in order to juice the economy ahead of the 1972 presidential election. What resulted was a “stop-go” approach to interest rate adjustments, with the Fed to flip-flopping between raising borrowing costs and lowering them even before price pressures had been fully stamped out.
Combined with a series of geopolitical shocks that caused oil prices to spike in the late-1970s, inflation took off.
It was not until Paul Volcker assumed the policy reins in 1979, asserted the Fed’s independence and raised interest rates aggressively that the situation started to stabilize. To extinguish inflation, Mr. Volcker was forced to engineer a painful recession that produced public outcry, a trade-off he framed as necessary to put the economy on a better path.
Throughout his tenure leading the Fed, Mr. Powell has frequently invoked Mr. Volcker’s legacy. At an event in March, he named him as his favorite central banker.
In the months since, Mr. Powell has kept interest rates on an even keel, adhering to a wait-and-see approach to restarting cuts that were paused in January after a series of reductions last year.
Despite pressure from Mr. Trump, that stance still has broad support among officials at the Fed, keeping the central bank on track to again hold interest rates steady when they next gather at the end of this month. If inflation defies expectations and stays mild through the end of the summer, that could open a path for the Fed to lower interest rates in September. Officials appear divided on both the timing and the magnitude of additional easing this year, however, potentially queuing up a more intense debate this fall.
Asked last week about how the president’s criticism was affecting him, Mr. Powell told a room full of policymakers, economists and investors that he was “very focused on just doing my job.” He was met with a resounding applause.
Whom Will Trump Choose?
Establishing that kind of credibility could be more of a challenge for certain contenders than others, although the candidates being floated are relatively traditional picks.
The list includes Treasury Secretary Scott Bessent, a former hedge fund manager who has shown a new willingness to go after the central bank as the audition process has intensified.
Kevin Hassett, who currently serves as the White House’s top economic adviser, is also seen as a leading choice, as are Kevin Warsh, a former Fed governor; and Christopher Waller, a current governor at the central bank.
Mr. Bessent and Mr. Hassett may have to take extra steps to demonstrate that in a new role at the independent Fed, they are no longer doing the president’s bidding.
Mr. Warsh, who was almost selected to be chair during Mr. Trump’s first term and was also considered for the Treasury Secretary position for the current administration, has been a vocal critic of the Fed and just this week made the case for the central bank to cut interest rates. But as a former governor, he has spoken favorably of the institution’s independence from the White House, calling it “precious” in a 2010 speech.
Mr. Waller, who was appointed by Mr. Trump in 2017, has in recent weeks splintered from most of his colleagues at the Fed in calling for an interest rate cut as early as the July meeting. He has based his argument on the fact that price pressures stemming from tariffs have so far been muted and in his view appear unlikely to become persistent. He has flagged that the labor market has cooled off, too.
A policymaker who had an extended tenure at the Federal Reserve Bank of St. Louis before joining the Board of Governors, Mr. Waller is seen as yet another defender of the institution’s independence.
But his long affiliation with the Fed could end up hurting his chances. In a recent blitz, Mr. Trump faulted the Board for following Mr. Powell’s lead. “The Board just sits there and watches, so they are equally to blame,” he wrote on social media last week.
The White House did not immediately respond to a request for comment.
The timing of when the president makes the announcement is also significant. Mr. Trump has threatened to name a successor long before Mr. Powell’s term as chair ends in May. His term as governor extends until 2028. The next opening on the Board will come at the end of January, when Adriana Kugler’s tenure ends. What is not yet clear is whether Mr. Powell will depart the Fed altogether or stay on, potentially limiting the number of seats Mr. Trump will be able to fill.
One concern is whether the chair-in-waiting would try to undermine Mr. Powell by espousing a divergent plan for interest rates during the interim period. That could cause “uncertainty and confusion,” said Thomas Hoenig, who served as president of the Federal Reserve Bank of Kansas City from 1991 to 2011.
Alan Blinder, who served as vice-chair of the Fed in the 1990s, likened that scenario to “creating a two-headed monster.”
“When the Fed starts talking with multiple voices, nobody’s going to know what it means,” he said.
Institutional Guardrails
Regardless of whom Mr. Trump nominates, there are guardrails in place that will limit the next chair’s ability to drastically change the trajectory of the Fed’s monetary policy if that person opposes the current approach on political grounds.
For one, decisions on interest rates and other big maneuvers must get majority support from the 12-person Federal Open Market Committee, which is composed of all seven governors on the Board and a rotating set of presidents from five of the regional Reserve Banks. The president is limited in his ability to remove Fed officials from their posts, the Supreme Court recently re-established.
Typically, the Fed chair leads the Federal Open Market Committee, but that decision is also determined by a vote. In that role, the chair has often been responsible for forging as much consensus as possible across the various policymakers. That means Mr. Powell’s replacement will have to persuade the rest of the Federal Open Market Committee as to why a given policy decision is appropriate.
“They have an uphill climb to restore credibility,” Mr. Obstfeld said of whomever Mr. Trump chooses. “But they can do that over time by making a strong, analytically based case for their decisions and utilizing the expertise of the Fed staff in a way that is credible to markets.”
“It’ll be especially easy to enhance credibility if they are acting contrary to what the president is recommending on social media,” he added.
Failing to do so could have the opposite effect to what Mr. Trump so desperately wants. Interest rates on longer-term Treasuries, which influence corporate and consumer borrowing costs across the country and worldwide, could instead spike, even as the Fed lowers short-term interest rates.
“If you really appoint a puppet as a Fed chair, what happens is that the long end of the yield curve will not go down,” said Riccardo Trezzi, a former Fed economist who runs the research firm Underlying Inflation. “It will go up because the markets will start pricing in permanently higher inflation.”
Colby Smith covers the Federal Reserve and the U.S. economy for The Times.
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